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2015 (5) TMI 617 - PUNJAB & HARYANA HIGH COURT

2015 (5) TMI 617 - PUNJAB & HARYANA HIGH COURT - [2015] 374 ITR 562 (P&H) - Disallowance contemplated by Section 40(a)(ia) - Whether can be applied when payments in respect of which tax is deductible at source has already been made by the assessee to the payee at the time of computing the income chargeable under the head "profits and gains of business or profession" i.e. at the close of the year? - Held that:- When we examine Section 40(a)(ia) in the backdrop of these sections, we find that it r .....

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of harmonious construction, the term 'payable' in Section 40(a)(ia) cannot be read separately from the provisions relating to TDS as pleaded on behalf of assessee. In our opinion, ld. CIT (Appeals) has rightly observed that taking the spirit of TDS provision into account and Section 40(a)(ia) being directly related to such TDS provision, a harmonious construction of the word 'payable' leads to inevitable conclusion that the said word also includes the 'paid' amount. It is evident that the emphas .....

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nt previous year and was actually paid within the previous year. In the result the question is decided in favour of revenue - ITA No.716 of 2009 (O&M), ITA No.130 of 2012, ITA No.171 of 2014, ITA No.188 of 2014 - Dated:- 29-4-2015 - S. J. Vazifdar, ACJ And G. S. Sandhawalia,JJ. For the Petitioner : Mr Ravish Sood, Adv., Mr Ravi Shankar, Mr B M Monga & Mr Rohit Kaura, Adv. For the Respondents : Mr Vivek Sethi, Adv. and Ms Urvashi Dhugga, Adv. JUDGMENT S.J. Vazifdar, Acting Chief Justice: The .....

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isallowance contemplated by Section 40(a)(ia) can be applied when payments in respect of which tax is deductible at source has already been made by the assessee to the payee at the time of computing the income chargeable under the head "profits and gains of business or profession" i.e. at the close of the year. The other two appeals are also admitted on this question of law. This judgment is, therefore, restricted to this question alone. 3. We have answered the question against the ass .....

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- "1. Whether the Tribunal had erred in law by failing to appreciate that the CIT (Appeal) by resorting to the cardinal rule of strict literal interpretation rightly interpreted the scope of applicability of Section 40(a)(ia) of the Income-tax Act, 1961, and had therein rightly restricted the disallowances as contemplated in the said section to the amounts 'PAYABLE' to the contractor or sub-contractor at the time of computing the income chargeable under the head "Profits and Ga .....

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Tribunal while interpreting the scope of applicability of Sec.40(a)(ia) of the 'Act' is right in law in brushing aside the settled rule of construction recognised by the Hon'ble Apex Court that if two reasonable constructions of a taxing provision are possible, then that construction which favours the assessee must be adopted?" 5. ITA No.130 of 2012 was admitted by an order dated 19.07.2013 on the following substantial questions of law:- "1. Whether the ITAT is justified in .....

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case because the payment of the freight to the transporters was responsibility and liability of the distributors and only the reimbursement, by way of credit notes, was made at a later date by the appellant and as per clause (vi) of the agreement distributors were required to make the payment to the transporter and deduct tax at source which liability cannot be fastened to the appellant? 3. Whether the Tribunal is justified in reallocating the common expenses to the both the units on sales basis .....

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payee (in this case, a contractor) at the time of computing the income chargeable under the head "profits and gains of business or profession" i.e. at the close of the year. 7. The appellant filed its income-tax return declaring a net income of ₹ 15,93,200/- as on 11.10.2005. The case was picked up for scrutiny assessment under Section 143(2) of the Act. The appellant produced the bills, vouchers and other records indicating expenses such as freight, wages, advertisement and publ .....

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lows the mercantile system. He also admitted that the TDS deducted had not been deposited to the credit of the Central Government. The Assessing Officer, accordingly, in view of Section 40(a)(ia) disallowed the expenses relating to the amounts in respect whereof TDS was liable to be deducted and paid. The Assessing Officer disallowed the aggregate expenses of ₹ 40,98,544/- under Section 40(a)(ia) and added the same to the assessee's total income. At the hearing before us, the appellant .....

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issioner of Income Tax (Appeals). The CIT (Appeals) found that out of the job work charges of ₹ 25,24,109/- only a sum of ₹ 7,65,807/- remained payable on which tax was not deducted, out of the publicity expenses, a sum of only ₹ 53,542/- remained payable on which tax was not deducted and under other heads i.e. shipping expenses, legal expenses, freight inward, clearing and forwarding charges, the entire amount of expenditure was paid and nothing remained payable. In respect of .....

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7; 53,542/- which remained payable and in respect of which the tax was not deducted at source and, in any event, was not paid to the Government account. 9. The Tribunal rightly accepted the case of the revenue. The Tribunal rightly held that if an assessee is liable to deduct and pay over TDS under Section 194C and the assessee fails to do so, the payments in respect of which the TDS was to be deducted and paid over are to be disallowed in view of Section 40(a)(ia). 10. While construing Section .....

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p;…………………………………………………………………………………………………………. (ia) Any interest, commission or brokerage, rent royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contracto .....

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he person responsible for paying to a resident any income by way of interest on securities shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax at the rates in force on the amount of the interest payable: ……… ……. …… ……… 194-C. Payments to contractors.-(1) Any person respons .....

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llip;…. …… ……… 200. Duty of person deducting tax.-(1) Any person deducting any sum in accordance with the foregoing provisions of this chapter] shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. (2) Any person being an employer, referred to in subsection (1-A) of Section 192 shall pay, within the prescribed time, the tax to the credit of the Central Government or as the Board directs .....

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sed by such authority such statement in such form and verified in such manner and setting forth such particulars and within such time as may be prescribed." It is also necessary to refer to Rule 30(2) of the Income Tax Rules which stipulates the time prescribed for payment of the tax deducted to the credit of the Central Government as required by Section 200(1). Rule 30(2), in so far as it is relevant, reads as under:- "Time and mode of payment to Government account of tax deducted at .....

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30th day of April where the income or amount is credited or paid in the month of March; and (b) in any other case, on or before seven days from the end of the month in which- (i) the deduction is made; or (ii) income-tax is due under sub-section(1A) of section 192." 11. The liability to deduct tax at source under the provisions of Chapter XVII is mandatory. A person responsible for paying any sum is also liable to deposit the amount in the Government account. All the sections in Chapter XV .....

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e sum is required to deduct the tax "at the time of credit of such sum to the account of the contractor or at the time of the payment thereof. ……". That the legislature has granted an assessee a relaxation from the rigours of Section 40(a)(ia) does not detract from the mandatory nature of the liability to deduct the tax at source under the various provisions of Chapter XVII-B. Our view is supported by the judgments of the Calcutta and Madras High Courts. 12. A Division Be .....

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tire sum contemplated under the respective sections. These sections do not give any leverage to the assessee to make the payment without making TDS. On the contrary, the intention of the legislature is evident from the fact that timing of deduction of tax is earliest possible opportunity to recover tax, either at the time of credit in the account of payee or at the time of payment to payee, whichever is earlier." 13. Ms. Dhugga invited our attention to a judgment of the Division Bench of Ma .....

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served that introduction of Section 40(a)(ia) had achieved the objective of augmenting the TDS to a substantial extent. The Division Bench also observed that when the provisions and procedures relating to TDS are scrupulously applied, it also ensured the identification of the payees thereby confirming the network of assessees and that once the assessees are identified it would enable the tax collection machinery to bring within its fold all such persons who are liable to come within the network .....

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0(a)(ia). 16. It is necessary to first deal with the contention on behalf of the appellant that section 40(a)(ia) relates only to assessees who follow the mercantile system and does not pertain to the assessees who follow the cash system. 17. There is nothing that persuades us to accept this submission. The purpose of the section is to ensure the recovery of tax. We see no indication in the section that this object was confined to the recovery of tax from a particular type of assessee or assesse .....

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ollowing the cash system are not liable to deduct tax at source. It is not suggested that the provisions of Chapter XVII-B do not apply to assessees following the cash system. There is nothing in Chapter XVII-B either that suggests otherwise. 18. Our view is fortified by the Explanatory Note to Finance Bill (No.2) of 2004. Sub-clause (ia) of clause (a) of Section 40 was introduced by the Finance Bill (No.2) of 2004 with effect from 01.04.2005. The Explanatory Note to Finance Bill-2004 stated:- & .....

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of the time prescribed under sub-section(1) of section 200 and in accordance with the other provisions of Chapter XVII-B. ......" 19. The adherence to the provisions ensures not merely the collection of tax but also enables the authorities to bring within their fold all such persons who are liable to come within the network of tax payers. The intention was to ensure the collection of tax irrespective of the system of accounting followed by the assessees. We do not see how this dual purpose .....

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mmissioner of Income Tax vs. Crescent Export Syndicate, (supra). It was held:- "12.3. It is noticeable that Section 40(a) is applicable irrespective of the method of accounting followed by an assessee. Therefore, by using the term 'payable' legislature included the entire accrued liability. If assessee was following mercantile system of accounting, then the moment amount was credited to the account of payee on accrual of liability, TDS was required to be made but if assessee was fol .....

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merely to assessees following the mercantile system but also to assessees following the cash system. If this view is correct and indeed we must proceed on the footing that it is, it goes a long way in indicating the fallacy in the appellant's main contention, namely, if the payments have already been made by the assessee to the payee/contracting party, the provisions of Section 40(a)(ia) would not be attracted even if the tax is not deducted and/or paid over to the Government account. 22. S .....

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an assessee is bound to deduct tax. There may be payments to persons referred to in Chapter XVII-B, which do not attract the provisions of Chapter XVII-B. The consequences under Section 40(a)(ia) would only operate on account of failure to deduct tax where the tax is liable to be deducted under the provisions of the Act and in particular Chapter XVII-B thereof. It is in that sense that the term "payable" has been used. The term "payable" is descriptive of the payments which a .....

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so specified under the sections in Chapter XVII, the amount is credited to the account of the payee. In other words, the liability to deduct tax at source arises not on account of the assessee being liable to the payee but only upon the liability being discharged in the case of an assessee following the cash system and upon credit being given by an assessee following the mercantile system. This is clear from every section in Chapter XVII. 24. Take for instance, the case of an assessee, who follo .....

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on 194C set out earlier. The liability to deduct tax at source, in the case of an assessee following the cash system, arises only when the payment is made and in the case of an assessee following the mercantile system, when he credits such sum to the account of the party entitled to receive the payment. 25. The government has nothing to do with the dispute between the assessee and the payee such as a contractor. The provisions of the Act including Section 40 and the provisions of Chapter XVII do .....

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ty. The third party may not press the claim. The parties may settle the dispute, if any. This is an exercise not even remotely required or even contemplated by the section. Once this is realized, the fallacy in the contention on behalf of the appellant becomes even more apparent. 26. As we have just noted, Section 40(a)(ia) also applies to assessees following the cash system and the liability of such assessees to deduct tax at source is only upon payment being made to the payee. If the appellant .....

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he opening part to any amounts payable to a party on the one hand and the concluding words "on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid - ........" on the other. It is clear, therefore, that the use of the term "payable" in Section 40(a)(ia) is only descriptive of the type or nature of payments by the assessee to the payees referred to in Section 40(a)(ia). 27. The error in the submission .....

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wever, concerned with the first proviso prior to its substitution for this case relates to the assessment year 2005-06. Prior to its substitution, the proviso substituted by the Finance Act, 2008 with retrospective effect from 1st April, 2005, read as under:- "Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted - (A) During the last month of the previous year but paid after the said due date; or (B) During any other month of the .....

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r, in case the assessee had already made payment to the payee and nothing is outstanding/payable to the payee, it would be impossible for the assessee, who is no more in possession of the funds, to effect the deduction at source with respect to such amounts which had already been paid. Thus, according to him, if the term "payable" is construed as including amounts which had already been paid, the first proviso would be rendered otiose. 29. The submission is not well founded. The provis .....

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unt of the payee. Merely because an assessee has not deducted the tax at the relevant time, it does not follow that the assessee cannot thereafter deduct the same. If, for instance, an assessee recovers the amount from the payee subsequently, it would still constitute a deduction from the amount payable to the payee. It would only constitute a subsequent deduction. But, a deduction it still is. The verb "deduct" means to take away and the noun "deduction" is the act or proces .....

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he view that we have taken. 30. Mr. Sood's reliance upon Section 24(b) is of no assistance. The interpretation of Section 24(b) cannot govern the interpretation of Section 40(a)(ia). Section 24(b) reads as under:- "24. Income chargeable under the head "Income from house property" shall be computed after making the following deductions, namely:- (a) ..... ..... ..... ..... (b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed ca .....

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The Division Bench of the Calcutta High Court in Commissioner of Income Tax vs. Crescent Export Syndicate, (supra) held:- "12.4. In our considered opinion, there is no ambiguity in the Section and term 'payable' cannot be ascribed narrow interpretation as contended by assessee. Had the intentions of the legislature were to disallow only items outstanding as on 31st March, then the term 'payable' would have been qualified by the phrase as outstanding on 31st March. However, .....

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;… ….. When we examine Section 40(a)(ia) in the backdrop of these sections, we find that it refers to the amount 'payable' 'on which tax was deductible at source under Chapter XVII-B'. Applying the principles of eujesdem generis, it can easily be inferred that term 'payable' in section 40(a)(ia) has to be interpreted in the light of sum referred to in various sections contained in Chapter XVII-B noted above, on which tax was deductible and, therefore, the te .....

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construction of the word 'payable' leads to inevitable conclusion that the said word also includes the 'paid' amount. 14. Ld. Counsel has relied on the dictionary meaning of term 'payable' which, in our opinion, cannot be resorted to in view of discussion in foregoing paras. The context in which term 'payable' has been used in Section 40(a)(ia) is to be taken into consideration. The context is various sections of Chapter XVII-B. ….. …… &hellip .....

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is evident that the emphasis is on liability to pay and not on actual payment. If we accept the contention of assessee, then Section 40(a)(ia) would become otiose and the section will not be attracted where payment is made though without deducting tax at source. Ld. Counsel has referred to the various decisions and in the case of Jaipur Vidyut Vitaran Nigam Limited (supra), the Tribunal had relied on the definition of Section 43(2) but the import of phrase 'incurred in accordance with the me .....

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hich become payable at any time during the relevant previous year and was actually paid within the previous year. In the result the question is decided in favour of revenue and against the assessee. ….. …… …… ….. We shall now endeavour to show that no other interpretation is possible. The key words used in Section 40(a)(ia), according to us, are "on which tax is deductible at source under Chapter XVII-B". If the question is "which expenses .....

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ear and susceptible to giving more than one meaning. By looking at the draft it could be said that the legislature wanted to treat the payments made or credited in favour of a contractor or sub-contractor differently than the payments on account of interest, commission or brokerage, fees for professional services or fees for technical services because the words "amounts credited or paid" were used only in relation to a contractor or sub-contractor. This differential treatment was not i .....

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law is clear and unambiguous whereas the language used in the bill was ambiguous." We are in respectful agreement with the conclusion and the reasoning of the Division Bench of the Calcutta High Court. 32. A Division Bench of the Gujarat High Court dealt with this issue in Commissioner of Income Tax vs. Sikandar Khan N. Tunwar and others, (2014) 220 TAXMAN 256 (Gujarat) = (2013) 357 ITR 312 (Guj). The Division Bench accepted the contention that the section must be construed strictly; that i .....

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above, which is such on which tax is deductible at source under Chapter XVII-B but such tax has not been deducted or if deducted not paid before the due date. This provision no-where requires that the amount which is payable must remain so payable throughout during the year. To reiterate the provision has certain strict and stringent requirements before the unpleasant consequences envisaged therein can be applied. We are prepared to and we are duty bound to interpret such requirements strictly. .....

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uld even otherwise be justified because in our opinion, the legislature could not have intended to bring about any such distinction nor the language used in the section brings about any such meaning. If the interpretation as advanced by the assessees is accepted, it would lead to a situation where the assessee who though was required to deduct the tax at source but no such deduction was made or more flagrantly deduction though made is not paid to the Government, would escape the consequence only .....

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t conveyed such a meaning, we would not have hesitated in adopting such an interpretation. We only highlight that we would not readily accept that the legislature desired to bring about an incongruous and seemingly irreconcilable consequences. The decision of the Supreme Court in the case of Commissioner of Income Tax, Gujarat Vs. Ashokbhai Chimanbhai (supra), would not alter this situation. The said decision, of course, recognizes the concept of ascertaining the profit and loss from the busines .....

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0(a)(ia) of the Act, we see no warrant in the said decision of the Supreme Court to apply the test of payability only as on 31st March of the year under consideration. Merely because, accounts are closed on that date and the computation of profit and loss is to be judged with reference to such date, does not mean that whether an amount is payable or not must be ascertained on the strength of the position emerging on 31st March. ….. …… …… ….. 38. In the r .....

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the conclusion and the reasoning of this judgment as well. 33. On behalf of the appellant, reliance was placed on a judgment of a Division Bench of the Allahabad High Court in Commissioner of Income Tax vs. M/s Vector Shipping Services (P) Ltd., (2013)262 CTR(All)545. The Division Bench noted the finding of the CIT (Appeals) to the effect that since it had not been disputed that no amount remained payable at the year end, addition could not be made in view of the Special Bench decision of the Tr .....

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hat TDS has not been deducted, the amount should be payable and not which has been paid by the end of the year. We do not find that the Tribunal has committed any error in recording the finding on the facts, which were not controverted by the department and thus the question of law as framed does not arise for consideration in the appeal." 34. We are with respect unable to agree with the view taken by the Division Bench of the Allahabad High Court. We do not have the benefit of any reasonin .....

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SCC 187, when an SLP is summarily dismissed under Article 136 of the Constitution, the Court does not lay down any law and that the dismissal of an SLP in limine by a non speaking order does not justify any inference that the contentions raised on the merits of the case have been rejected and that all that the Supreme Court can be held in such a case to have decided is that it was not a fit case where special leave should be granted. When a special leave petition is dismissed, the Supreme Court .....

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dated 18.11.2014 in The Commissioner of Income Tax-II vs. JDS Apparels Private Limited, Income Tax Appeal No.608/2014. The Division Bench did not deal with the issue before us. Mr. Sood relied upon the observations in paragraph-17 to the effect that Section 40(a)(ia) should not have been invoked on the principle of doubtful penalization. 36. We are not dealing here with the question of penalty. We have been called upon to interpret the provisions of Section 40(a)(ia). 37. Mr. Sood also relied up .....

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atnam)} that the disallowance u/s 40(a)(ia) is to be made only in respect of payments which are outstanding at the end of financial year and payment of which is without deduction of tax (after end of Financial Year)." The Division Bench held as under:- "As regards the question relating to deduction of tax at source, suffice it to state that the Tribunal has merely restored the matter to the assessing officer by asking him to verify the transactions and if found to be correct, pass orde .....

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down the principle that where the amounts have been paid during the year under consideration itself and nothing is payable at the close of the year, no disallowance was warranted under section 40(a)(ia) of the Act for non deduction of tax at source out of such amount paid during the year. Following the above said parity of reasoning, we direct the Assessing Officer to verify the stand of the assessee and in case the said amounts have been paid by the assessee during the year under consideration .....

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